R&D tax relief – HMRC back track on reimbursed expenses

A claim for R&D tax relief includes certain specific expenses such as staffing costs, software and consumable materials.

In recent years, HMRC have rejected the inclusion of non-contractual staffing costs such as reimbursed travel expenses, allowing only the cost of salaries, employers national insurance and employers pension contributions, to form part of the R&D calculation.

However, this has always been an area of contention, until now. HMRC have now updated their guidance to allow claims for reimbursement of expenses to employees, to qualify as a staffing costs.

To be a qualifying cost, the employee must bear the initial cost of the reimbursed expense and the expense must be incurred to fulfil their R&D employment duties. Costs such as home to work travel and reimbursed training costs are not allowable.

The updated guidance allows those companies who may have omitted these expenses to make a late claim – even where the normal time limit has passed. To qualify, the original claim must have been submitted on or after 9 October 2014, be in respect of accounting periods ending between 9 October 2014 and 31 January 2016 and have passed the normal time limit for the amendment. The normal time limit is the first anniversary of the filing date for the accounting period – the filing date is usually 12 months after the end of the accounting year (but can differ) – thus making the anniversary 12 months thereafter. Any claim must be made by 31 January 2018.

It may be that the company accounting period falls later than 31 January 2016 – if so, the company is still in time to make a claim under the normal time limit for amendments. For instance, a claim for the period to 31 March 2016 is still within the normal time limits until 31 March 2018.

HMRC give the following three examples:

Example 1

Jane is an employee, who undertakes qualifying research and development as part of her work. She travels to another location to hold a meeting to discuss the emerging findings of the research. She pays the train fare of £10, which is subsequently refunded to her by her employer.

In this example, the £10 refunded to Jane constitutes an expense of the company of employing Jane. Jane initially paid £10 to meet an expense she incurred in order to fulfil the requirements of her employment, an expense that was personal to her and to her performance of her employment. The £10 payment is an allowable staffing cost of the company.

Example 2

Jane subsequently holds the second meeting in a different location. On this occasion, she pays £100 for the hire of a meeting room, and also £10 for her train fare. The employer refunds £110 to Jane.

In this example the £10 refund of the train fare is correctly treated as allowable staffing costs under the same analysis as example 1.

However, the £100 refund of the meeting room hire cost is not an allowable staff cost. The cost to the company of hiring a room is not a cost of employing staff. Neither is it a cost that relates to Jane’s performance of the requirements of her job.

Example 3

Suresh is a director of a company that carries out R&D, and he undertakes qualifying research and development as part of his work.

He pays £1,000 for roof repairs to the company R&D facility. The company subsequently refunds £1,000 to Suresh.

The £1,000 refund of the roof repair cost is not a qualifying staff cost. The cost of repairing the roof is not an expense of employing staff. Nor does the cost of the roof repair constitute an expense that Suresh pays in order to fulfil the requirements of his job.

It is important that you consider the viability of the claim before any amendments are submitted to HMRC – it could be the case that it costs more in professional fees to amend the claim, than the additional tax relief your company receives.

If you wish to talk to us about R&D, please contact:

  • Lee Watson or Alison Welch in Darlington – 01325 349700
  • Nicola Bellerby or Claudine Norden in Durham – 0191 3842244
  • Alan Moore or Graham Richardson in York – 01904 784400